The new regulations on the 20% deduction available to pass through entities, contain a safe harbor for owners of rental properties.
Real estate rentals to qualify for the 20% deduction if:
- Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise,
- For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed per year with respect to the rental enterprise (the 250 hors includes time spent by contractors);
- and starting in 2019, the taxpayer maintains contemporaneous records, including time reports, logs, or similar documents (like an Excel spreadsheet), regarding the following:
- hours of all services performed;
- descriptions of all services performed;
- dates on which such services were performed; and
- who performed the services
If the taxpayer qualifies for the safe harbor, the rental activity is considered a trade or business and the income from the activity is considered qualified business income for purposes of the deduction.
Triple net leases and vacation homes are excluded from the safe harbor test, which includes aggregation rules, minimum hours of service rules, a definition of rental services, and rules for contemporaneous records.
The IRS still has some clarifications to make on the regulations, so we will keep you posted.
